Friday, October 18, 2013

Short Selling Banks Covering on Gold?

HOUSTON –  Editor’s note:  I have been traveling and distracted on other, very important “business,” such as the scene below at the ranch.  I actually began the piece below on October 15, and finally got around to finishing it this morning.  That will explain the apparently odd syntax in places.  Staff did not want to scrap the piece.  Anyway, below is the scene from the ranch that holds my attention better than Washington D.C. political knuckleheads.

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The original piece began:  Judging by our mail a good many of you have been discouraged by recent news events such as the Goldman Sachs call by Jeffrey Currie that gold is a “slam dunk sell;” by the on-again/off again threat by the Fed that they might reduce monetary stimulus; by the debt limit rhubarb in Washington, among other distractions. 

The action in gold, silver and mining shares hasn’t helped very much, including the strange, blatant market selling action on Tuesday, October 1 (gold down $40 in a couple hours) and again on Friday, October 11 right after the COMEX open in New York when a reported single 5,000-lot sell “at market” took December gold down $25 in a few minutes, with a 10-second circuit breaking halt in the middle of the trade.  Below is an hourly gold chart for quick reference.

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Just a side point here.  Should we even bother to mention that no single trader should be able to dump 5,000 COMEX futures contracts into the market in a single trade?  The supposed limit for all traders in the spot month is no more than 3,000 contracts, as we noted before after the April 12 smash of gold then.  Of course the Commodities Futures Trading Commission (CFTC) grants exemptions to some elite traders of futures – the ones who can claim they are doing “bona fide hedging.”  There is supposed to be paperwork involved when a trader goes over-limit and the CFTC says they scrutinize hedging exemptions, but it’s all kept perfectly opaque to the public and therefore invisible to ordinary market watchers. 

Further into this tangential discussion on the October 11 sell-down, 5,000 lots is the equivalent of 500,000 ounces of gold with a notional value of more than half a billion U.S. dollars (about $635 million at $1270 gold).  A 5,000 lot trade requires at minimum enough capital to meet an initial bond requirement of roughly $30 million, so the selling player was no small fry. 

Someone tried to send a message in the gold market and, by definition, that someone was “big”.  ‘That someone’ has a big bank account and is capable of exceeding the CFTC (often ignored) position limits.  ‘That someone’ had little or no fear that their oversized sell raid might be mistaken as “trading for effect,” which is also supposed to be illegal.  (Pause for laughter.)  It was the kind of trade where the number of participants capable of throwing that much weight around is low.  They could be counted on both hands. 

GartmanImageAs our friend Dennis Gartman (who loves to ridicule a consistent unnamed strawman he calls "gold bugs" or more derisively, just "bugs," but is nevertheless long gold in yen terms), pointed out the open interest on the COMEX actually rose slightly concurrent with that sale on October 11, so chances are it was not a liquidation of a long position, either by choice, force liquidated or otherwise.  It was someone putting on new paper shorts – betting on the downside in a big way.  (Edit: Recall that gold was around $1290 when that trade hit the COMEX.) 

(Edit again: We reason that yesterday’s sharp rally, taking gold back up to above $1300 very quickly in a 4:00 am bull rush, was in part an unwinding of the shorts put on October 11, by the way.)   

Now, which large trader can we think of that might have had reason to “send a message” in the gold market on October 11?  It’s all opaque anyway and no trader is going to own up to it, but if we had to guess who the miscreant short seller of gold futures was then, we would point an accusing finger Currie Jeff Goldman raiderat Goldman Sachs, whose head of commodities research (the guy who feeds the traders, like a head trader), Jeffrey Currie, had arrogantly called gold a “slam dunk sell” at a conference in London.  He was joined by other gold trading banks around the same time of that call at the London conference in one way or another (including Morgan Stanley and Credit Suisse analysts).  It was a kind of bear full court press, in other words, coinciding with a budget impasse in Congress and a looming fight over the U.S. “debt limit.”

But are there too many bears on the same side of the boat? 

Rule Rick small smileNow, if we may be permitted a side bar off this tangent, we cannot help but add here that Sprott Global’s Rick Rule recently told Henry Bonner that: “I suspect the call on the part of Goldman Sachs and Morgan Stanley will resemble their disastrous calls about collateralized mortgage bonds and real-estate heading into the 2007 and 2008 collapse. I think this call on gold is just as ill-timed and ill-advised.” 

(Edit:  Good call so far, Rick.)  We’re all pulling for Rule in this argument, to no one’s surprise, and I said as much in a Dow Jones MarketWatch comment October 16.  Quoting from that article, it read: 

“Conventional wisdom is that gold will sell off on the announcement of a final debt-limit increase,” said Gene Arensberg, editor of the Got Gold Report. But prices having dropped to lows in the $1,250s suggest that “conventional wisdom may get its head handed to it with so many leaning in one direction” — toward a gold selloff, he said. “In other words, with so many people leaning toward the idea that gold will sell off on a debt-limit deal, it has me looking for the exact opposite,” said Arensberg. “I think gold would have already broken much lower if that view was ‘real’.” Given all that, he said he would not be surprised by an initial spike lower in gold prices, followed by “an outside reversal and rally with so much buying coming in from Asia.”

So far so good, on that notion also.  It does look like a short covering rally has begun, but the sheer number of bearish analysts from gold trading banks all going public at the same time at the beginning of the month suggests there are sure a lot of big money bearish bets out there.  Why else would all these very highly paid and influential market gurus all be out there talking their books at the same time, if not to influence the market just a bit and if they can? 

Goldman’s, or more accurately, Curries' call could ultimately be “right” of course, but for the record, and in answer to those of you who have written in with anxious comments recently, Goldman, Morgan Stanley and Credit Suisse are merely talking their book.  Sure, they have reputations to protect and they are often right, but they could be spectacularly wrong too as my buddy Rick already pointed out.      

The gold selling banks rely on public and institutional reaction to follow their bearish lead.  They do indeed wield a big stick, especially when they act in unison on the selling side of things, but as big as they are, the global gold market dwarfs them. 

The banks might be able to move the market their way for a short while (no pun), but the gold market will only stay knocked down to irrationally low levels for brief periods.  That’s because abnormally low prices have consequences.  Producers hold up on selling.  Investors with a long term view take advantage.  Arbitrageurs take advantage of higher premiums in other markets to lock in riskless profits and so on.  The effect is that, as Rule so often says, the cure for low prices is low prices.     

So far, the people of India are apparently not buying into the gold selling banks call for lower gold – not if premiums are any guide.  According to an October 15 story in the Times of India gold has become so scarce in country that people had to pay $100 an ounce over the London Fix recently, a record high premium according to some sources.  (A stunning number.)  

The rumor mill is buzzing about ‘enormous buying of physical gold’ in Singapore, Hong Kong and in mainland China.  We noted the stories in recent weeks regarding heavy, consistent buying of physical gold, highlighted in the work done recently by Jan Skoyles of the Real Asset Co. along with Koos Jansen.    

Traders and analysts we respect suggest that China alone accounts for perhaps 1,000 tonnes of gold being bought per year now or a pace of 83 tonnes per month. Some analysts believe that China now has acquired in excess of 3,000 tonnes of gold quietly, more than triple their last update of gold holdings in 2009. 

(Pause for effect.)  We could go on and on, but as my favorite uncle might have put it:  Here’s the deal.  On the one hand we have short term bullion trading banks trying to knock gold down to make their paper shorts more profitable while most of Asia is taking advantage to score as much of the physical metal as they can on any price dips.

Memo to the banks:  The Asians are buying, big time. 

All of this short term angst; the short term bearish full court press being put on by already short bullion trading banks (who either actually believe the central planners have saved everyone's economic bacon or ... OR, willfully ignore that central banks are printing oceans of new currency, which has to have unintended consequences sooner or later);  ... is a distraction. 

My long term view has not changed.  Global debasement of fiat currencies is almost certainly going to lead to a confidence crisis in most, if not all fiat currencies and the governments that print them.  We cannot know when, in advance, but some pretty smart people I respect say that once some unknown threshold is crossed and the behavior of the market participants changes, the world will see “The Big One” start to unfold. 

“The Big One” is our term for a coming economic storm; a genuine 1970's style global collapse in confidence for all fiat currencies. Just below is a chart of the U.S. Dollar Index in daily terms for reference.

20131018 USD

(Edit:  That zone near 79 is beginning to look important, is it not?  Is the gold market beginning to discount something a bit farther out in time?)

Those experts say that once the confidence powder keg detonates it can happen with lightening speed.  And, when it does we are all likely to be glad for the real deal physical gold and silver we have managed to squirrel away. 

Until then the attempts to manhandle the market by the likes of Jeffrey Currie and some of the other net short bullion trading banks are giving us (and apparently a large number of Asian investors) a second chance to buy some "metal insurance" at more reasonable prices.

Arensberg Gene CaptainAs my favorite uncle used to say:  Some gifts come unnoticed and unwrapped.  

Rig for heavy weather.  A ‘storm’ is coming.  

Postscript:  As of this writing, still no schedule for CFTC commitments of traders data to resume, but we will keep an eye out for it.

Yesterday the CFTC put out a press release which read:  "The U.S. Commodity Futures Trading Commission’s (CFTC) announced today that the Commitments of Traders and Cotton on Call reports previously scheduled for release on October 17th and October 18th respectively, will not be published this week. The CFTC is performing the work necessary to resume publishing these and other reports and will announce a revised schedule once more information becomes available."

Gene Arensberg for Got Gold Report

While we wait for the precious metals markets to return to a more normal state, you'll find us here (below at the ranch)  more and more!  That will explain if we seem scarce from time to time. Hold down the fort. 

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The Original
Vulture Speculator

Trading gold, silver and mining shares since 1980 with a focus on taking advantage of volatility extremes, Gene Arensberg analyses the markets through a basket of technical and fundamental indicators and shares his findings from time to time here at Got Gold Report. Mr. Arensberg has been quoted in the Wall Street Journal, Dow Jones MarketWatch, USA Today and dozens of other news organizations.

"I've been a huge fan of Gene and his amazing work for years..."

Brien Lundin, CEO, Jefferson Financial, Host of the annual New Orleans Investment Conference and Publisher of Gold Newsletter

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